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Required Minimum Distribution (RMD) and the CARES Act: What You Need to Know

The coronavirus pandemic has paralysed the world economically and brought about a great reason to worry about our financial security, amongst other things. America is one of the worst-hit countries with active COVID-19 patients on a daily rise. In the face of such a threatening crisis, the Coronavirus Aid, Relief, and Economic Security Act, simply referred to as the CARES Act was brought into law on March 27, 2020. A similar act was provisioned during the 2009 financial crisis. The law aims to help Americans facing extreme financial, physical, business-related impact. While it does have many facets, we are going to discuss the one that focuses on retirees. This article will elaborate further on the recent change to Required Minimum Distribution (RMD) and why it’s an opportunity worth seizing.

The CARES Act on Required Minimum Distributions:

In Section 2203 titled “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts, “those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.”

Pre-CARES Act RMDs

Before the recent changes, the law demanded distributions to a plan participant or an IRA holder beginning simultaneously with the required beginning date. This date is April 1 following the year in which the individual turned 70 years and six months old. As opposed to an IRA, Required Minimum Distributions from a plan can be delayed to the year in which the individual retires. The age requirement under RMDs under the SECURE Act was 72.
Distributions from a plan were not subject to the 20% tax withholding applicable to other cash distributions. No similar requirement is made for distributions from IRAs..

Post-CARES Act RMDs

Following the recent changes, the RMD requirement has been renounced for distributions required in 2020 only. Previously, if a candidate turned 70 years and six months old in 2019, the first RMD would have to be made by April 1, 2020, and the other on or before December 31, 2020. However, under the CARES Act, both these RMDs have been waived. Note that the waiver will not apply if the candidate took the Required Minimum Distribution in 2019. The waiver will also not apply to individuals who turn 72 in 2020, given that their first RMD is due only until April 1, 2021, which is when after this waiver expires.

Distributions from a plan during the present year that would otherwise have been RMDs without this waiver will be subject to the 20% withholding requirement. However, thanks to the CARES Act during the coronavirus pandemic, the 20% withholding does not apply.

While the CARES Act does not explicitly and specifically mention inherited IRAs, it says RMDs have been withheld for all retirement accounts. Hence, unless further clarification is provided, this implies that the candidates who have inherited an IRA are also not required to take RMDs in 2020, hence including both lifetime and post-death RMDs.

Temporary Rules to Remember

The RMD rules don’t apply for 2020 to all and every defined contribution retirement plan, including IRAs, 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, traditional IRAs and Roth IRAs. However, A 457 plan sponsored by a non-government employer exempt from taxes isn’t qualified for the suspension of RMDs.

Also note:

  • A plan sponsor client will consider whether or not it wants to adopt the RMD relief administratively.
  • A plan participant client will consider whether he/she wants to take a distribution equal to the RMD amount due to financial demands; alternatively, you could discuss the possibility of taking the funds and rolling them over to an IRA.
  • An IRA client will consider whether he/she needs the money or took an RMD without completely realizing whether it was required and now would like to roll it over.

Think About the Following when Skipping RMDs in 2020

It’s a no-brainer that the biggest pro about this provision of skipping your RMDs for the season is a reduced tax bill. Now, since that money would, under normal circumstances, count as income, you would have to expect a higher tax bill next season. But, during the coronavirus pandemic and the ensuing collective financial stress, the Government is easing the enhanced financial stress on retirees.

Also worth remembering is that your RMDs would be partly determined based on the account balance as of December 31, 2019. But, that time was of economic prosperity and peak market strength. As we mentioned earlier, the government is trying to ease the stress of the economic volatility through the CARES Act by giving the retirees the chance and the time to have their accounts regain value lost over the past few months. Withdrawing their accounts now would have retirees paying taxes on a value that is missing in their accounts. Remember that you still have the option to withdraw from your account, but are not under an obligation to do so. If you are split between the two options, we suggest speaking to a trusted financial advisor who can help you evaluate your retirement plan and make adjustments according to the changes.

Conclusion

Other CARES Act provisions are designed to give the patients affected by the COVID-19 as they are likely to have been laid off due to the Coronavirus pandemic. This also includes people whose spouse or dependent has been diagnosed with the virus or those who are going through “adverse financial consequences” because of quarantine, furlough or layoff, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of the individual’s business, or “other factors as determined by the Secretary of the Treasury.” Such individuals can self-certify one or more of terms of this definition.

However, this Required Minimum Distribution delay does just the opposite, in that it permits participants and IRA holders to forego taking money out of their retirement savings through a waiver. This helps the candidates avoid having to liquidate funds that may have faced significant losses in the market meltdown due to the coronavirus pandemic.